Agency Theory

An economic term, agency theory is one of the main concepts of the contract theory of institutional economics. It focuses on the agency relationship that arises whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service and then delegate decision-making authority to the agents and reward the service based on the quality and quantity provided by the agents.

Agency theory is based on asymmetric informative game theory, where the asymmetric information refers to the fact that some participants have information that other participants do not have. It is often seen in start-ups, when the entrepreneur employs a manager to conduct the business on his or her behalf, or if there are conflicts between the owner and managers, ...